Inflated employee pay at the heart of Alberta government’s debt

From wages to benefits to job security to early retirement, government employee compensation must be constrained

By Charles Lammam and Steve Lafleur The Fraser Institute

Alberta’s public finances are in rough shape.

The government of Premier Rachel Notley expects to run another budget deficit this year (estimated at $8.8 billion) and has no plan to balance the books until at least 2023-24. Since 2014-15, the province has added more than $33 billion in net debt with roughly $36 billion more planned for the next five years.

CharlesLammam

How did Alberta get to this point?

There are many factors but Alberta’s fiscal challenges today are largely due to the fact that successive governments – past Progressive Conservative ones and the current NDP administration – have done a poor job of controlling the growth in government spending.

To repair provincial finances and address the root cause of Alberta’s fiscal problems, it’s critical for the government to constrain future spending increases. An important area of spending to scrutinize is the wages and benefits of government employees, which consume a sizable portion of the Alberta government’s annual program spending.

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And there’s ample evidence suggesting there’s scope to better control compensation costs going forward. Research consistently shows that the wages and benefits of government employees tend to eclipse those for comparable private-sector positions.

A new Fraser Institute study provides the latest estimates of the government wage premium in Alberta. Using Statistics Canada data, the study finds that government employees (federal, provincial and local) receive, on average, 9.6 per cent higher wages than comparable workers in the private sector. This wage premium accounts for differences between workers in the two sectors such as their age, gender, education, tenure, experience and type of work.

But wages are just one component of total compensation, which includes pensions, early retirement and job security. Once various non-wage benefits are factored in, data from Statistics Canada suggests that government employees come out even further ahead.

Consider the imbalance on pensions, one of the costliest benefits provided to workers in both sectors. In 2017, 72 per cent of government workers in Alberta were covered by a registered pension plan compared to 24.2 per cent of private sector workers. Among those covered, virtually all in the government sector (95.3 per cent) had a defined benefit pension – which guarantees a level of benefits in retirement – versus just 29.3 per cent of workers in the private sector.

Government-sector workers in Alberta also retire 1.7 years earlier, on average, than private-sector workers. And they’re away from their jobs for personal reasons 11.8 days a year compared to 6.5 days for private sector workers.

When it comes to job security, another non-wage benefit, government workers have a distinct advantage. In 2017, 4.2 per cent of private-sector employees in Alberta experienced job loss – roughly six times higher than the 0.7 per cent of government-sector employees.

Of course, governments need to provide competitive compensation to attract qualified employees. But the fact is that wages and benefits in the government sector are out of step with the private sector.

So what drives this disparity in wages and benefits?

One important reason for the government wage premium is that in the government sector, political factors largely determine the wage-setting process. On the other hand, economic realities – such as productivity concerns, profitability and resource constraints – guide the process in the private sector. Moreover, the monopoly environment of the government sector amplifies these differences, compared to the competitive environment of the private sector.

Bringing government employee compensation more in line with private-sector norms is one way the Alberta government could help stem the province’s troubling debt accumulation.

Rather than passively hoping for another spectacular oil boom, actively working now to control compensation costs can help this government avoid passing along even more debt to future generations.

Charles Lammam and Steve Lafleur are analysts with the Fraser Institute and co-authors of the new report Comparing Government and Private Sector Compensation in Alberta, 2018.